The term coin burn or coin burning is characteristic of crypto markets, and is intended to eliminate a portion of the total crypto assets available in the ecosystem.
In this way, the cryptocurrencies in circulation are permanently eliminated. For this they are sent to a public address where they can never be spent, because their particular keys cannot be recovered.
This public address is available for review by any user.
Burning coins can be used to:
- Create new currencies
- Give rewards to coin providers
- Destroy coins or tokens that were not sold after an ICO sale
How coin burn works
For a burning of coins or tokens to occur, the following steps must be followed and respecting the order.
- The cryptocurrency carrier activates the burn function by indicating how many coins you want to burn.
- The contract verifies that the bearer really has the amount of coins he wants to burn in his wallet and that the number is valid and the balance is positive.
- The function will not be executed if the number entered is not valid (between 0 and -5) or the balance is not sufficient.
- If the above points are met, then the cryptocurrencies will be subtracted from the carrier’s wallet.
- The total supply is updated and the cryptocurrencies will be burned.
- Burned coins will be destroyed without the possibility of reversal once the function has been executed.
We are not talking about a disintegration of currencies but it makes them useless for the future. Therefore they are placed in a public and unrecoverable wallet. It is also visible to all nodes but is permanently frozen and its status will be published on the blockchain to be consulted by whoever wants it.
Some projects will burn tokens once their ICO is finished, removing the tokens that were marketed in order to incentivize other participants. Others, such as Binance, burn every quarter after the purpose of reaching 50% of all BNB tokens incorporated into their blockchain.
BNB, an example of burning coins
Binance periodically performs coin burning using smart contract. They are function is scheduled to be executed automatically every three months. 50% of the circulating currencies are burned quarterly and this will continue until reaching the amount of 100 million BNB, since the total that will be issued will be 200 million BNB.
Why cryptocurrencies are burned
They are generally used to maintain a stable value and encourage merchants to maintain their crypto assets, in addition to being a deflationary action. Among other reasons we have:
- First give more value to the currency by reducing the existence.
- To correct mistakes as Tether did when he accidentally created USDT 5 billion, this forced them to burn them so as not to destabilize the 1: 1 relationship with the USD.
- It can also be used to prevent spam transactions by adding a safe house. Ripple did so to eliminate incentives for system overload and for protection against DDoS.
Other functions, although not usual, can be:
- Create a more reliable mechanism to add and verify transactions in the blockchain.
- As a cryptocurrency burning test (PoB) consensus
- To reduce the number of miners at a specific time.
As we have seen, the burning of coins has several functions within the ecosystem and will be determined by the specific scenario of the blockchain that will apply the strategy. The most common are to eliminate coins that were not placed in the ICO and to increase the value of circulating coins within the ecosystem.
The burning of coins or coin burn could be taken as a good practice, because it serves to guarantee the performance of the cryptoactive decently.
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